Thursday, May 29, 2008

Investigate Big Congress, Not Big Oil

The simple fact is that the prices of oil and gasoline are determined by supply and demand—which neither private oil companies nor speculators have any power to dictate in their favor. If they had such market mastery, then why didn't they use it in the 1990s, when gasoline was selling at a barely profitable $1 a gallon? To be sure, speculators can bid up prices—but they only do so when they believe that oil will become even more expensive in the future, and only make money when they are right.

The question Congress should really be asking, then, is: What nonmarket factors are distorting supply and demand? If they sought an honest answer, they would discover that much of the blame lies with Congress itself.

Read more here.

5 Comments:

At 5/30/2008 12:00 AM, Anonymous Anonymous said...

"If they had such market mastery, then why didn't they use it in the 1990s, when gasoline was selling at a barely profitable $1 a gallon?"

A: Because of the relatively new method of institutional investing that directs massive amounts of money in commodity hedges. Between 2003 and the first quarter of 2008, hedging in commodity index futures rose from $13 billion to over $260 billion.

" To be sure, speculators can bid up prices—but they only do so when they believe that oil will become even more expensive in the future..."

Yeah, that thesis would rely upon rational actors that act rationally all of time. Instead, there are tens of billions of dollars of hedge funds and mutual funds chasing a rather finite futures resource.

"...and only make money when they are right."

See: Tulips, Holland, first half of 17th century. Also: Housing stock, USA, early 21st century. Fact is, this sordid tale has been repeated with disastrous results many times down through history.

"The question Congress should really be asking, then, is: What nonmarket factors are distorting supply and demand? If they sought an honest answer, they would discover that much of the blame lies with Congress itself."

Doesn't this entire paragraph contradict the entire previous paragraph?

I'd like to think that economics could be a coldly logical, scientific field. The mantra-like "supply and demand dictate price" paradigm is invalid today. The talking heads are buried up to their necks in sand dunes.

skh.pcola

 
At 5/30/2008 3:14 AM, Blogger juandos said...

Hmmm, anon @ 12:00 AM brings up some very interesting points...

I'm wondering about this phrase though: "rather finite futures resource"...

Finite? Crude oil?

"Doesn't this entire paragraph contradict the entire previous paragraph?"...

No it doesn't... Non-market forces were hard at work in the '90's...

"The mantra-like "supply and demand dictate price" paradigm is invalid today"...

When was the real world basic law of simple economics repealed?

 
At 5/30/2008 7:16 AM, Anonymous Anonymous said...

juandos, I have about 10 minutes to get ready and leave the house, so I don't have the time to fully explain what I meant. I can do that later today, though. This testimony of a hedge fund manager in front of a Senate committee is informative:

hsgac.senate.gov/public/_files/052008Masters.pdf

skh.pcola

 
At 5/30/2008 1:39 PM, Blogger Marko said...

Ummm, isn't demand for futures contracts still demand? People are buying something because they think they can make money in the future. That is not a distortion of the market. It may be unexpected, but if you could have expected it you could have joined in and made lots of money.

We need oil companies to investigate congress. Really - invite the press, demand that our public employees (congressmen) show up, and grill them for a few days about why they are not permitting private enterprise to drill for oil and why they are over regulating the whole thing and driving up prices. I would watch that on pay per view!

 
At 5/30/2008 4:56 PM, Anonymous Nick said...

What we need to do, is solve the energy crisis now. Oil prices as well. Have you seen what oil users have been going through? Some are even going as far as stealing oil supplies. Working for NORA, I fully support greener alternatives. But you know, oil users can just use a B5 blend of oil and help conserve 400 MILLION gallons of oil. Plus, it produces NO greenhouse gases, reduces emissions, and can be made with many veggies. LoL. Grab some info from this site: http://oilheatamerica.com/index.mv?screen=bioheat

 

Post a Comment

<< Home